Tax audits

When you receive an IRS audit notice by mail, it is important to take it seriously. Carefully read the letter and make note of what the IRS is asking you to do or provide. Tax audits may be conducted in person, by phone, or by email. The IRS may ask for additional information or documentation. If you have access to the requested information, you may be able to easily respond. If you do not have the information required, you'll need to determine whether and how you may be able to extend the deadline.

You will usually have 30 days to respond, but the notice should specify how and by what deadline you must answer the inquiry. If you are responding by mail, use a delivery confirmation service to make sure that the IRS receives your letter. If you do not respond, or your response is not received when due, you may not be able to appeal your case.
 

The IRS will contact you by mail. They will not contact you by email or telephone unless an appointment is arranged. You or someone you know may have been contacted by someone falsely posing as a tax representative, so you may be wondering how to know if the person contacting you represents the IRS or not.

According to the IRS, legitimate tax authorities will not:

• Make specific payment demands, such as requiring you to make tax payments using a prepaid debit card, gift card, or wire transfer.
• Ask for your bank information over the phone.
• Threaten or intimidate you by saying they will contact the police, immigration officers, or other law enforcement officers.
• Demand that you make payments without a right to appeal.
• Request payment from you without sending a bill by mail.
• Call you about a "surprise" refund.

If you get a suspicious phone call, you can contact the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Trade Commission to report the call. If you think you might owe the IRS, call 1-800-829-1040 to verify.

To learn more about IRS phone scams, see Phone Scams Pose Serious Threat; Remain on IRS Dirty Dozen List of Tax Scams.

Preparing for your tax audit can make the process smoother and help ease some of the stress that can come with the process. The steps you should take to prepare depend in part on whether your audit will be conducted as a correspondence audit, an office audit, or a field audit. 

Correspondence audits are conducted, as the name implies, without face-to-face interactions. The IRS will notify you that they need certain information and you must respond, providing them with the requested documents or answers to inquiries. Because of the relatively straightforward nature of this type of audit, preparing for it typically involves confirming your response adequately addresses the questions raised in the audit notice. 

If your audit will instead be an office audit, conducted at a local IRS office, or a field audit, conducted at your place of business (or your tax professional’s or tax attorney’s office), your tax professional or lawyer can help you prepare by: 

• Reviewing the IRS letter and document request 

• Preparing copies of your tax returns for the time period(s) in question 

• Gathering relevant documentation including receipts for expenses and profit and loss statements 

• Verifying that the information provided to the IRS on your tax returns was reported and computed accurately

You can attend your own tax audit, but some tax professionals warn that you may say things that are not in your best interest or you may not understand your tax obligations well. If your tax situation is simple, you may be able to manage your own audit. If your tax situation is complicated, you may want to hire a tax preparer to attend your audit for you. Or, if you have anxiety about your audit, you may benefit from hiring a tax professional.

A tax professional can greatly help you with your tax situation. They understand tax terms, are comfortable speaking with the IRS, understand your rights, are experienced negotiators, and more. If you hire them and give them limited authority under a Power of Attorney, they can act on your behalf.

An IRS tax representative can:

• Communicate with the IRS
• Organize your paperwork
• Protect your taxpayer's rights
• Manage appeals if necessary
• Identify critical parts of your audit
• Negotiate your debt balance and payment arrangements

When the IRS concludes a tax audit, there are three possible outcomes: 

• No changes

• The IRS proposes changes and you agree with those changes

• The IRS proposes changes with which you do not agree

If you agree with the auditor’s findings and owe additional taxes, you will likely also owe penalties and interest. You can work with the IRS to pay any amounts owed. 

When a taxpayer disagrees with the auditor’s findings, you have the right to request a conference with an IRS manager, have the matter decided in mediation, or file an appeal if there is still time to do so under the applicable statute of limitations. 

If the outcome of your appeal, mediation, or conference is that you owe additional taxes to the IRS, you could face accuracy-related penalties of up to 40% of the underpaid tax amount. If the IRS findings result in charges of civil fraud, you may owe penalties of up to 75% of underpaid taxes resulting from fraudulent activity. In extreme cases, where the IRS determines you were evading your responsibility to pay taxes, you could also face time behind bars.

In most situations, you do not need a tax lawyer to help you with an audit. Keep in mind that many audits are chosen randomly, and you may not have a problem with the IRS at all. Hopefully, you've kept meticulous, organized records and you'll likely manage the audit with no problems. The first thing to do is to find all records that justify everything included in your business return. Gather copies of your:

• Electronic transactions records
• Bank statements, canceled checks, and receipts
• Accounting ledgers and journals, if you have them
• Business calendar and appointment books
• Records for partially claimed items such as mobile phones and your personal vehicle
• Travel and expense records, if any

The better organized you are, the better off you'll be and the faster the audit will go. If the audit brings up legitimate issues and you need to appeal your audit, you may want to hire a tax lawyer or CPA to help you navigate the appeal.